Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Detection of Loss of Connection, 52926-52932 [2016-18911]
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Federal Register / Vol. 81, No. 154 / Wednesday, August 10, 2016 / Notices
the basis for the Fund’s calculation of
NAV at the end of the day.
3. Shares will be purchased and
redeemed in Creation Units and
generally on an in-kind basis. Except
where the purchase or redemption will
include cash under the limited
circumstances specified in the
application, purchasers will be required
to purchase Creation Units by
depositing specified instruments
(‘‘Deposit Instruments’’), and
shareholders redeeming their shares
will receive specified instruments
(‘‘Redemption Instruments’’). The
Deposit Instruments and the
Redemption Instruments will each
correspond pro rata to the positions in
the Fund’s portfolio (including cash
positions) except as specified in the
application.
4. Because shares will not be
individually redeemable, applicants
request an exemption from section
5(a)(1) and section 2(a)(32) of the Act
that would permit the Funds to register
as open-end management investment
companies and issue shares that are
redeemable in Creation Units only.
5. Applicants also request an
exemption from section 22(d) of the Act
and rule 22c–1 under the Act as
secondary market trading in shares will
take place at negotiated prices, not at a
current offering price described in a
Fund’s prospectus, and not at a price
based on NAV. Applicants state that (a)
secondary market trading in shares does
not involve a Fund as a party and will
not result in dilution of an investment
in shares, and (b) to the extent different
prices exist during a given trading day,
or from day to day, such variances occur
as a result of third-party market forces,
such as supply and demand. Therefore,
applicants assert that secondary market
transactions in shares will not lead to
discrimination or preferential treatment
among purchasers. Finally, applicants
represent that share market prices will
be disciplined by arbitrage
opportunities, which should prevent
shares from trading at a material
discount or premium from NAV.
6. With respect to Funds that hold
non-U.S. Portfolio Holdings and that
effect creations and redemptions of
Creation Units in kind, applicants
request relief from the requirement
imposed by section 22(e) in order to
allow such Funds to pay redemption
proceeds within fifteen calendar days
following the tender of Creation Units
for redemption. Applicants assert that
the requested relief would not be
inconsistent with the spirit and intent of
section 22(e) to prevent unreasonable,
undisclosed or unforeseen delays in the
actual payment of redemption proceeds.
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7. Applicants request an exemption to
permit Funds of Funds to acquire Fund
shares beyond the limits of section
12(d)(1)(A) of the Act; and the Funds,
and any principal underwriter for the
Funds, and/or any broker or dealer
registered under the Exchange Act, to
sell shares to Funds of Funds beyond
the limits of section 12(d)(1)(B) of the
Act. The application’s terms and
conditions are designed to, among other
things, help prevent any potential (i)
undue influence over a Fund through
control or voting power, or in
connection with certain services,
transactions, and underwritings, (ii)
excessive layering of fees, and (iii)
overly complex fund structures, which
are the concerns underlying the limits
in sections 12(d)(1)(A) and (B) of the
Act.
8. Applicants request an exemption
from sections 17(a)(1) and 17(a)(2) of the
Act to permit persons that are Affiliated
Persons, or Second Tier Affiliates, of the
Funds, solely by virtue of certain
ownership interests, to effectuate
purchases and redemptions in-kind. The
deposit procedures for in-kind
purchases of Creation Units and the
redemption procedures for in-kind
redemptions of Creation Units will be
the same for all purchases and
redemptions and Deposit Instruments
and Redemption Instruments will be
valued in the same manner as those
Portfolio Holdings currently held by the
Funds. Applicants also seek relief from
the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.2
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Applicants also request relief to
permit a Feeder Fund to acquire shares
of another registered investment
company managed by the Adviser
having substantially the same
investment objectives as the Feeder
Fund (‘‘Master Fund’’) beyond the
limitations in section 12(d)(1)(A) and
permit the Master Fund, and any
principal underwriter for the Master
2 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
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Fund, to sell shares of the Master Fund
to the Feeder Fund beyond the
limitations in section 12(d)(1)(B).
10. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–18914 Filed 8–9–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78480; File No. SR–
NASDAQ–2016–097]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Related to
Detection of Loss of Connection
August 4, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on July 28,
2016, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
1 15
2 17
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solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NASDAQ Options Market LLC’s
(‘‘NOM’’) Rules at Chapter VI, Section 6,
entitled ‘‘Acceptance of Quotes and
Orders’’ to adopt functionality which is
designed to assist NOM Participants,
hereinafter ‘‘Participants,’’ in the event
that they lose communication with their
assigned Financial Information
eXchange (‘‘FIX’’),3 Specialized Quote
Feed (‘‘SQF’’),4 or Ouch to Trade
Options (‘‘OTTO’’) 5 Ports due to a loss
of connectivity.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Chapter VI, Section 6, entitled
‘‘Acceptance of Quotes and Orders’’ to
adopt a new section ‘‘(e)’’ entitled
‘‘Detection of Loss of Connection,’’ a
new automated process which NOM
proposes to adopt for its SQF,6 FIX and
3 FIX
permits the entry of orders.
permits the transmission of quotes to the
Exchange by a NOM Market Maker using its Client
Application.
5 OTTO permits the transmission of orders to the
Exchange by a Participant. Immediate or cancel
orders will not be cancelled pursuant to this
Chapter VI, Section 6 because, by definition, these
orders will cancel if not executed. All Participants
have the ability to utilize OTTO. Orders submitted
by NOM Market Makers over this interface will be
treated as quotes.
6 Today, SQF, FIX and OTTO have the capability
to cancel quotes and orders respectively. The rule
change would adopt a formalized process to
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4 SQF
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OTTO Ports in the event that they lose
communication with a Client
Application due to a loss of
connectivity. This feature is designed to
protect NOM Options Market Makers 7
and other market participants from
inadvertent exposure to excessive risk.
By way of background, Participants
currently enter quotes and orders
utilizing either an SQF, FIX or OTTO
Port. SQF is utilized by NOM Options
Market Makers. FIX and OTTO are
available to all market participants.
These ports are System 8 components
through which a Participant
communicates its quotes and/or orders
to the NOM match engine through the
Participant’s Client Application.
Under the proposed rule change, an
SQF Port would be defined as the
Exchange’s System component through
which Participants communicate their
quotes from the Client Application at
proposed Chapter VI, Section 6(e)(i)(B).
FIX and OTTO Ports would be defined
as the Exchange’s System components
through which Participants
communicate their orders from the
Client Application at proposed Chapter
VI, Section 6(e)(i)(C). NOM Options
Market Makers may submit quotes to the
Exchange from one or more SQF Ports.
Similarly, market participants may
submit orders to the Exchange from one
or more FIX and/or OTTO Ports. The
proposed removal feature will be
mandatory for each NOM Market
Makers utilizing SQF for the removal of
quotes and optional for any market
participant utilizing FIX and OTTO for
the removal of orders.
When the SQF Port detects the loss of
communication with a Participant’s
Client Application because the
Exchange’s server does not receive a
Heartbeat message 9 for a certain period
of time (‘‘nn’’ seconds), the Exchange
will automatically logoff the
Participant’s affected Client Application
and automatically cancel all of the
automatically disconnect and cancel quotes for SQF
and offer the opportunity to cancel orders for FIX
and OTTO in addition to a disconnect if elected,
when there is a loss of communication with the
Participant’s Client Application. The Exchange is
formalizing the process within Chapter VI, Section
6(e).
7 The term ‘‘Nasdaq Options Market Maker’’ or
‘‘Options Market Maker’’ (herein ‘‘NOM Market
Maker’’) means an Options Participant registered
with the Exchange for the purpose of making
markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VII of these
Rules. See NOM Rules at Chapter I, Section 1(a)(26).
8 The term ‘‘System’’ shall mean the automated
system for order execution and trade reporting
owned and operated by NOM as the NOM Options
market. See Chapter VI, Section 1(a).
9 It is important to note that the Exchange
separately sends a connectivity message to the
Participant as evidence of connectivity.
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Participant’s open quotes. Quotes will
be cancelled across all Client
Applications that are associated with
the same NOM Market Makers ID and
underlying issues.
The Exchange proposes to define
‘‘Client Application’’ as the System
component of the Participant through
which the Exchange Participant
communicates its quotes and orders to
the Exchange at proposed Chapter VI,
Section 6(e)(i)(D). The Exchange
proposes to define a ‘‘Heartbeat’’
message as a communication that acts as
a virtual pulse between the SQF, FIX or
OTTO Port and the Client Application
at proposed Chapter VI, Section
6(e)(i)(A). The Heartbeat message sent
by the Participant and subsequently
received by the Exchange allows the
SQF, FIX or OTTO Port to continually
monitor its connection with the
Participant.
SQF Ports
The Exchange’s System has a default
time period, which will trigger a
disconnect from the Exchange and
remove quotes, set to fifteen (15)
seconds for SQF Ports. A Participant
may change the default period of ‘‘nn’’
seconds of no technical connectivity to
trigger a disconnect from the Exchange
and remove quotes to a number between
one hundred (100) milliseconds and
99,999 milliseconds for SQF Ports prior
to each session of connectivity to the
Exchange. This feature is enabled for
each NOM Market Makers and may not
be disabled.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
systemically or (2) by contacting the
Exchange’s operations staff. If the
Participant systemically changes the
default number of ‘‘nn’’ seconds, that
new setting shall be in effect throughout
the current session of connectivity 10
and will then default back to fifteen
seconds.11 The Participant may change
the default setting systemically prior to
each session of connectivity. The
Participant may also communicate the
time to the Exchange by calling the
Exchange’s operations staff. If the time
period is communicated to the
10 Each time the Participant connects to the
Exchange’s System is a new period of connectivity.
For example, if the Participant were to connect and
then disconnect within a trading day several times,
each time the Participant disconnected the next
session would be a new session of connectivity.
11 The Exchange’s System would capture the new
setting information that was changed by the
Participant and utilize the amended setting for that
particular session. The setting would not persist
beyond the current session of connectivity and the
setting would default back to 15 seconds for the
next session if the Participant did not change the
setting again.
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Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the Participant shall persist
for each subsequent session of
connectivity until the Participant either
contacts Exchange operations and
changes the setting or the Participant
systemically selects another time period
prior to the next session of connectivity.
FIX Ports
The Exchange’s System has a default
time period, which will trigger a
disconnect from the Exchange and
remove orders, set to thirty (30) seconds
for FIX Ports. The Participant may
disable the removal of orders feature but
not the disconnect feature. If the
Participant elects to have its orders
removed, in addition to the disconnect,
the Participant may determine a time
period of no technical connectivity to
trigger the disconnect and removal of
orders between (1) second and thirty
(30) seconds for FIX Ports prior to each
session of connectivity to the Exchange.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
systemically or (2) by contacting the
Exchange’s operations staff. If the
Participant systemically changes the
default number of ‘‘nn’’ seconds, that
new setting shall be in effect throughout
that session of connectivity and will
then default back to thirty seconds at
the end of that session. The Participant
may change the default setting
systemically prior to each session of
connectivity. The Participant may also
communicate the time to the Exchange
by calling the Exchange’s operations
staff. If the time period is communicated
to the Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the Participant shall persist
for each subsequent session of
connectivity until the Participant either
contacts Exchange operations and
changes the setting or the Participant
systemically selects another time period
prior to the next session of connectivity.
Similar to SQF Ports, when a FIX Port
detects the loss of communication with
a Participant’s Client Application for a
certain time period (‘‘nn’’ seconds), the
Exchange will automatically logoff the
Participant’s affected Client Application
and if elected, automatically cancel all
open orders. The Participant may have
an order which has routed away prior to
the cancellation, in the event that the
order returns to the Order Book, because
it was either not filled or partially filled,
that order will be subsequently
cancelled.
The disconnect feature is mandatory
for FIX users, however the user has the
ability to elect to also enable a removal
feature, which will cancel all open
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orders submitted through that FIX Port.
If the removal of orders feature is not
enabled, the System will simply
disconnect the FIX user and not cancel
any orders. The FIX user would have to
commence a new session to add, modify
or cancel its orders once disconnected.
OTTO Ports
The Exchange’s System has a default
time period, which will trigger a
disconnect from the Exchange and
remove orders, set to fifteen (15)
seconds for OTTO Ports. The Participant
may disable the removal of orders
feature but not the disconnect feature. If
the Participant elects to have its orders
removed, in addition to the disconnect,
the Participant may determine a time
period of no technical connectivity to
trigger the disconnect and removal of
orders between one hundred (100)
milliseconds and 99,999 milliseconds.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
systemically or (2) by contacting the
Exchange’s operations staff. If the
Participant systemically changes the
default number of ‘‘nn’’ seconds, that
new setting shall be in effect throughout
that session of connectivity and will
then default back to fifteen seconds at
the end of that session. The Participant
may change the default setting
systemically prior to each session of
connectivity. The Participant may also
communicate the time to the Exchange
by calling the Exchange’s operations
staff. If the time period is communicated
to the Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the Participant shall persist
for each subsequent session of
connectivity until the Participant either
contacts Exchange operations and
changes the setting or the Participant
systemically selects another time period
prior to the next session of connectivity.
Similar to SQF and FIX Ports, when
an OTTO Port detects the loss of
communication with a Participant’s
Client Application for a certain time
period (‘‘nn’’ seconds), the Exchange
will automatically logoff the
Participant’s affected Client Application
and if elected, automatically cancel all
open orders. The Participant may have
an order which has routed away prior to
the cancellation; in the event that the
order returns to the Order Book, because
it was either not filled or partially filled,
that order will be subsequently
cancelled.
The disconnect feature is mandatory
for OTTO users however the user has
the ability to elect to also enable a
removal feature, which will cancel all
open orders submitted through that
OTTO Port. If the removal of orders
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feature is not enabled, the System will
simply disconnect the OTTO user and
not cancel any orders. The OTTO user
would have to commence a new session
to add, modify or cancel its orders once
disconnected.
The trigger for the SQF, FIX and
OTTO Ports is event and Client
Application specific. The automatic
cancellation of the NOM Market Maker’s
quotes for SQF Ports and open orders,
if elected by the Participant for FIX and
OTTO Ports entered into the respective
SQF, FIX or OTTO Ports via a particular
Client Application will neither impact
nor determine the treatment of the
quotes of other NOM Market Makers
entered into SQF Ports or orders of the
same or other Participants entered into
FIX or OTTO Ports via a separate and
distinct Client Application.
In other words, with respect to quotes,
each NOM Market Maker only
maintains one quote in a given option
in the order book. A new quote would
replace the existing quote. Orders on the
other hand do not replace each other in
the order book as multiple orders may
exist in a given option at once.
Therefore, the difference in the impact
between NOM Market Makers
submitting quotes and Participants
submitting orders is that quotes may
continue to be submitted and/or
refreshed by unaffected NOM Market
Makers because these market
participants are cancelled based on ID
when an SQF Port disconnects, whereas
all of the open orders submitted by a
given firm will be impacted when a FIX
or OTTO port disconnects, if the firm
elected to have orders cancelled.
The Exchange will issue an Options
Trader Alert advising Participants on
the manner in which they should
communicate the number of ‘‘nn’’
seconds to the Exchange for SQF, FIX
and OTTO Ports.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,12 in general, and furthers the
objectives of Section 6(b)(5) of the Act,13
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest, by
offering removal functionality for NOM
Market Makers as well as all other
market participants to prevent
disruption in the marketplace and also
12 15
13 15
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offering this removal feature to other
market participants.
NOM Market Makers will be required
to utilize removal functionality with
respect to SQF Ports. This feature will
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and
protect investors and the public interest
by requiring NOM Market Makers
quotes to be removed in the event of a
loss of connectivity with the Exchange’s
System. NOM Market Makers provide
liquidity to the market place and have
obligations unlike other market
participants.14 This risk feature for SQF
is important because it will enable NOM
Market Makers to avoid risks associated
with inadvertent executions in the event
of a loss of connectivity with the
Exchange. The proposed rule change is
designed to not permit unfair
discrimination among market
participants, as it would apply
uniformly to all NOM Market Makers
utilizing SQF.
Utilizing a time period for SQF Ports
of fifteen (15) seconds and permitting
the NOM Market Makers to modify the
setting to between 100 milliseconds and
99,999 milliseconds is consistent with
the Act because the Exchange does not
desire to trigger unwarranted logoffs of
Participants and therefore allows
Participants the ability to set their time
in order to enable the Exchange the
authority to disconnect the Participant
with this feature. Each NOM Market
Makers has different levels of sensitivity
with respect to this disconnect setting
and each NOM Market Makers has their
own system safeguards as well. A
default setting of fifteen (15) seconds is
appropriate to capture the needs of all
NOM Market Makers and high enough
not to trigger unwarranted removal of
quotes.
Further, NOM Market Makers are able
to customize their setting. The
Exchange’s proposal to permit a
timeframe for SQF Ports between 100
milliseconds and 99,999 milliseconds is
consistent with the Act and the
protection of investors because the
purpose of this feature is to mitigate the
risk of potential erroneous or
14 Pursuant to NOM Rules at Chapter VII, Section
5, entitled ‘‘Obligations of NOM Options Market
Makers’’, in registering as a market maker, an
Options Participant commits himself to various
obligations. Transactions of a NOM Options Market
Makers must constitute a course of dealings
reasonably calculated to contribute to the
maintenance of a fair and orderly market, and NOM
Options Market Makers should not make bids or
offers or enter into transactions that are inconsistent
with such course of dealings. Further, all NOM
Options Market Makers are designated as specialists
on NOM for all purposes under the Act or rules
thereunder. See Chapter VII, Section 5.
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unintended executions associated with
a loss in communication with a Client
Application. Participants are able to
better anticipate the appropriate time
within which they may require prior to
a logoff as compared to the Exchange.
The Participant is being offered a
timeframe by the Exchange within
which to select the appropriate time.
The Exchange does not desire to trigger
unwarranted logoffs of Participants and
therefore permits Participants to provide
an alternative time to the Exchange,
within the Exchange’s prescribed
timeframe, which authorized the
Exchange to disconnect the Participant.
The ‘‘nn’’ seconds serve as the
Participant’s instruction to the Exchange
to act upon the loss of connection and
remove quotes from the System. This
range will accommodate Participants in
selecting their appropriate times within
the prescribed timeframes.
Also, NOM Market Makers have
quoting obligations 15 and are more
sensitive to price movements as
compared to other market participants.
It is consistent with the Act to provide
a wider timeframe within which to
customize settings for FIX Ports as
compared to SQF Ports. NOM Market
Makers need to remain vigilant of
market conditions and react more
quickly to market movements as
compared to other Participants entering
orders into the System. The proposal
acknowledges this sensitivity borne by
NOM Market Makers and reflects the
reaction time of NOM Market Makers as
compared to Participants entering
orders. Of note, the proposed
customized timeframe for FIX would be
too long for NOM Market Makers given
their quoting requirements and
sensitivity to price movements. NOM
Market Makers would be severely
impacted by a loss of connectivity of
more than several seconds. The NOM
Market Makers would have exposure
during the time period in which they
are unable to manage their quote and
update that quote. The Participant is
best positioned to determine its setting.
The Exchange’s proposal is further
consistent with the Act because it will
mitigate the risk of potential erroneous
or unintended executions associated
with a loss in communication with a
Client Application which protects
investors and the public interest. Also,
any interest that is executable against a
NOM Market Maker’s quotes that is
received 16 by the Exchange prior to the
trigger of the disconnect to the Client
15 See
note 14 above.
time of receipt for an order or quote is the
time such message is processed by the Exchange
book.
16 The
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52929
Application, which is processed by the
System, automatically executes at the
price up to the NOM Market Maker’s
size. In other words, the System will
process the request for cancellation in
the order it was received by the System.
The System operates consistently
with the firm quote obligations of a
broker-dealer pursuant to Rule 602 of
Regulation NMS. Specifically, with
respect to NOM Market Makers, their
obligation to provide continuous twosided quotes on a daily basis is not
diminished by the removal of such
quotes triggered by the disconnect.
NOM Market Makers are required to
provide continuous two-sided quotes on
a daily basis.17 NOM Market Makers
will not be relieved of the obligation to
provide continuous two-sided quotes on
a daily basis, nor will it prohibit the
Exchange from taking disciplinary
action against a NOM Market Makers for
failing to meet the continuous quoting
obligation each trading day as a result
of disconnects.
The proposal to permit NOM Market
Makers to amend the default setting at
the beginning of each session of
connectivity is consistent with the Act
because it avoids unwarranted logoffs of
Participants and provides Participants
the opportunity to set a time, within the
prescribed timeframe, to authorize the
Exchange to disconnect the Participant.
Today, NASDAQ PHLX LLC (‘‘Phlx’’)
and NASDAQ BX, INC. (‘‘BX’’) offer its
market makers a similar feature to the
one proposed by the Exchange for the
automatic removal of quotes when
connectivity issues arise.18 Phlx and BX
have identical rules to the NOM
proposal for SQF Ports.
With respect to FIX Ports,19 the
Exchange will offer an optional removal
functionality to all market participants.
Offering the FIX removal feature on a
voluntary basis to all other non-Market
Maker Participants is consistent with
the Act because it permits them an
opportunity to utilize this risk feature,
if desired, and avoid risks associated
with inadvertent executions in the event
of a loss of connectivity with the
Exchange. The removal feature is
designed to mitigate the risk of missed
and/or unintended executions
associated with a loss in communication
with a Client Application.
The proposed rule change is designed
to not permit unfair discrimination
among market participants, as this
17 See
note 14 above.
Phlx Rule 1019(c) and BX Rule at Chapter
VI, Section 6(e).
19 OTTO ports may be utilized today by non-NOM
Market Makers. The removal functionality remains
optional for non-NOM Market Makers similar to
FIX.
18 See
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removal feature will be offered
uniformly to all Participants utilizing
FIX. The Exchange will not require
OTTO users to utilize the removal
feature for orders similar to FIX. The
disconnect feature for FIX is mandatory,
however market participants will have
the option to either enable or disable the
removal feature, which would result in
the cancellation of all orders submitted
over a FIX port when such port
disconnects. It is appropriate to offer
this removal feature as optional to all
market participants utilizing FIX
because these market participants may
not bear the same magnitude of risk of
potential erroneous or unintended
executions.20 In addition, market
participants utilizing FIX may desire
their orders to remain on the order book
despite a technical disconnect, so as not
to miss any opportunities for execution
of such orders while the FIX session is
disconnected. The Exchange will
disconnect Participants from the
Exchange and not cancel its orders if the
removal feature is disabled for FIX. The
disconnect feature is mandatory and
will cause the Participant to be
disconnected within the default
timeframe or the timeframe otherwise
specified by the Participant.
This feature is consistent with the Act
because it enables FIX or OTTO users,
particularly non-Market Maker OTTO
users, the ability to disconnect from the
Exchange, assess the situation and make
a determination concerning their risk
exposure. The Exchange notes that in
the event that orders need to be
removed, the Participant may elect to
utilize the Kill Switch 21 feature. It is
consistent with the Act to require other
market participants to be disconnected
because the Participant is otherwise not
connected to the Exchange’s System and
the Participant simply needs to
reconnect to commence submitting and
cancelling orders. Requiring a
disconnect when a loss of
communication is detected is a rational
course of action for the Exchange to
alert the Participant of the technical
connectivity issue.
The Exchange’s proposal to set a
default timeframe of thirty (30) seconds
for FIX and permit a FIX user to
customize their timeframe between 1
second and 30 seconds for the removal
of orders is consistent with the Act and
the protection of investors because the
purpose of this optional feature is to
mitigate the risk of potential erroneous
20 NOM Market Makers utilizes both SQF and
OTTO and would be subject to quoting obligations.
21 See NOM Rule at Chapter VI, Section 6(d). The
Kill Switch would impact all three protocols, SQF,
FIX and OTTO.
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Jkt 238001
or unintended executions associated
with a loss in communication with a
Client Application. Participants
selecting the removal feature are able to
better anticipate the appropriate time
that they require prior to a logoff as
compared to the Exchange, within the
Exchange’s prescribed timeframes.
The Exchange does not desire to
trigger unwarranted logoffs of
Participants and therefore permits
Participants to provide a time to the
Exchange, within the Exchange’s
prescribed timeframe, to authorize the
Exchange to disconnect the Participant
and remove orders. The ‘‘nn’’ seconds
serve as the Participant’s instruction to
the Exchange to act upon the loss of
connection and remove orders from the
System. The Participant is also best
positioned to determine that it only
desires the disconnect feature, which is
mandatory, and not the removal feature.
The Exchange’s proposal to offer FIX
users the removal feature on a voluntary
basis is similar to Phlx and BX.22 Both
Phlx and BX have identical rules
regarding FIX and a loss of
communication as proposed for NOM.
The proposed timeframe for the FIX
feature is consistent with the Act
because the Exchange seeks to provide
its Participants with the ability to select
the amount of time that they desire for
a loss of communication prior to taking
action to cancel open orders or simply
disconnect. The Participant should have
the ability to select the appropriate time,
within a prescribed timeframe, for
authorizing the Exchange to cancel its
open orders or simply disconnect from
the Exchange. Inadvertent cancellations
may create a greater risk of harm to
investors and the Participant is better
positioned to determine the appropriate
time, with the prescribed timeframe, to
remove orders or disconnect.
With respect to OTTO Ports, the
Exchange notes that it offers OTTO to
all market participants, not just NOM
Market Makers. Similar to SQF, the
Exchange desires to utilize the 15
second default with the ability to
customize the setting to permit a
timeframe between 100 milliseconds
and 99,999 milliseconds. The Exchange
believes that it is consistent with the
Act to utilize the shorter timeframe of
15 seconds as compared to the 30
second timeframe for FIX because today,
OTTO is utilized solely by NOM Market
Makers, although it is offered to all
Participants. OTTO orders submitted by
NOM Market Makers over this interface
are treated as quotes for purposes of
compiling with quoting obligations.
22 See Phlx Rule 1019(c) and BX Rule at Chapter
VI, Section 6(e).
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
As noted previously, NOM Market
Makers have quoting obligations 23 and
are more sensitive to price movements
as compared to other market
participants. NOM Market Makers need
to remain vigilant of market conditions
and react more quickly to market
movements as compared to other
Participants entering orders into the
System. The proposal acknowledges this
sensitivity borne by NOM Market
Makers and reflects the reaction time of
NOM Market Makers as compared to
Participants entering orders. NOM
Market Makers would be severely
impacted by a loss of connectivity of
more than several seconds. The NOM
Market Makers would have exposure
during the time period in which they
are unable to manage their quote and
update that quote. The Participant is
best positioned to determine its setting.
Also, the Exchange desires to offer NOM
Market Makers the ability to have SQF
quotes and OTTO orders removed with
the same timeframes in order that NOM
Market Makers may attend to all open
interest in a similar manner with this
risk feature.
The Exchange notes that offering the
shorter timeframe, despite the fact that
non-Market Maker Participants are
utilizing this feature is also consistent
with the Act because the removal
feature will not be mandatory. The
disconnect feature for OTTO will be
mandatory, however market participants
will have the option to either enable or
disable the removal feature, which
would result in the cancellation of all
orders submitted over an OTTO Port
when such port disconnects. NOM
Market Makers will be able to set a
similar timeframe for both SQF and
OTTO to ensure all open interest is
removed simultaneously.
The Exchange believes that it is
consistent with the Act to permit OTTO
users to disable the removal feature,
similar to FIX, because the Exchange
does not desire to require non-Market
Maker Participants to have orders
removed on mandatory basis. While the
Exchange believes that this risk feature
will mitigate the risk of potential
erroneous or unintended executions
associated with a loss in communication
with a Client Application which
protects investors and the public
interest, as noted above, Participants are
able to better anticipate the appropriate
time within which they may require
prior to a logoff as compared to the
Exchange.
The Exchange does not desire to
trigger unwarranted logoffs of
Participants and therefore permits
23 See
E:\FR\FM\10AUN1.SGM
note 14 above.
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Participants to provide an alternative
time to the Exchange, within the
Exchange’s prescribed timeframe, which
authorized the Exchange to disconnect
the Participant. The ‘‘nn’’ seconds serve
as the Participant’s instruction to the
Exchange to act upon the loss of
connection and remove quotes from the
System. This range will accommodate
Participants in selecting their
appropriate times within the prescribed
timeframes.
The Exchange believes this hybrid
approach will permit NOM Market
Makers to synchronize the removal of
their SQF quotes and OTTO orders,24
while still permitting non-Market Maker
Participants the ability to choose to
enable the risk feature. OTTO is not
available on either Phlx or BX, so the
OTTO feature is not similar to those
markets, rather, as mentioned, it is a
hybrid approach.
It is appropriate to offer this removal
feature as optional to all Participants
utilizing OTTO, who may not be
required to provide quotes in all
products in which they are registered.
Non-Market Maker Participants utilizing
OTTO may not bear the same magnitude
of risk of potential erroneous or
unintended executions as NOM Market
Makers. In addition, non-Market Maker
Participants utilizing OTTO may desire
their orders to remain on the order book
despite a technical disconnect, so as not
to miss any opportunities for execution
of such orders while the OTTO session
is disconnected. OTTO is similar to FIX
on Phlx and BX because it offers market
participants, on a voluntary basis, the
ability to cancel orders when a technical
disconnect occurs.25
The Exchange’s default timeframe for
the disconnect and removal of orders for
OTTO is 15 seconds with the ability to
modify that timeframe to between 100
milliseconds and 99,999 milliseconds,
on a session by session basis. This
timeframe is similar to the SQF
timeframe offered by Phlx and BX
today.26 Similar to FIX on Phlx and BX
today, OTTO users may choose to
enable or disable the removal feature
when a disconnect occurs. The
proposed timeframe for the OTTO
feature is consistent with the Act
because the Exchange seeks to provide
its Participants with the ability to select
the amount of time that they desire for
a loss of communication prior to taking
24 NOM Market Makers may utilize both SQF and
OTTO.
25 See Phlx Rule 1019(c) and BX Rule at Chapter
VI, Section 6(e).
26 Id.
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17:34 Aug 09, 2016
Jkt 238001
action to cancel open orders or simply
disconnect.
The Exchange notes that Participants
are free to select the protocols with
which they desire to access NOM. The
Exchange does not require Participants
to utilize more than one protocol to
access NOM. The proposed rule change
will help maintain a fair and orderly
market which promotes efficiency and
protects investors. This mandatory
removal feature for NOM Market Makers
using SQF and optional removal for all
market participants using FIX or OTTO
will mitigate the risk of potential
erroneous or unintended executions
associated with a loss in communication
with a Client Application.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange does not believe the
proposed rule change will cause an
undue burden on intra-market
competition because NOM Market
Makers, unlike other market
participants, have greater risks in the
market place. Quoting across many
series in an option creates large
principal positions that expose NOM
Market Makers, who are required to
continuously quote in assigned options,
to potentially significant market risk.
Providing a broader timeframe for the
disconnect and removal of orders for
FIX as compared to the disconnect and
removal of quotes for SQF Ports does
not create an undue burden on
competition. NOM Market Makers have
quoting obligations 27 and are more
sensitive to price movements as
compared to other market participants.
The proposal does not impose an undue
burden on intra-market competition
because it provides a tighter timeframe
for the disconnect and removal of
quotes for SQF Ports as compared to the
disconnect and removal of orders, if
enabled, for FIX Ports. NOM Market
Makers need to remain vigilant of
market conditions and react more
quickly to market movements as
compared to other Participants entering
multiple orders into the System.
The proposal reflects this sensitivity
borne by NOM Market Makers and
reflects the reaction time of NOM
Market Makers as compared to other
Participants entering orders. Offering
the removal feature to other market
participants on an optional basis for FIX
and OTTO users does not create an
27 See
PO 00000
note 14 above.
Frm 00122
Fmt 4703
undue burden on intra-market
competition because unlike NOM
Market Makers, other market
participants do not bear the same risks
of potential erroneous or unintended
executions. FIX users have the
opportunity to disable the removal
feature and simply disconnect from the
Exchange. FIX users may also set a
timeframe that is appropriate for their
business. It is appropriate to offer this
optional cancellation functionality to
other market participants for open
orders, because those orders are subject
to risks of missed and/or unintended
executions due to a lack of connectivity
which the Participants need to weigh.
Today, OTTO is utilized solely by
NOM Market Makers, although it is
offered to all Participants. OTTO Orders
submitted by NOM Market Makers over
this interface are treated as quotes for
purposes of compiling with quoting
obligations. NOM Market Makers have
quoting obligations 28 and are more
sensitive to price movements as
compared to other market participants.
NOM Market Makers need to remain
vigilant of market conditions and react
more quickly to market movements as
compared to other Participants entering
orders into the System. For this reason,
the proposal does not impose an undue
burden on intra-market competition
because the proposal acknowledges this
sensitivity borne by NOM Market
Makers and reflects the reaction time of
NOM Market Makers as compared to
Participants entering orders. As noted,
NOM Market Makers would be severely
impacted by a loss of connectivity of
more than several seconds. NOM Market
Makers would have exposure during the
time period in which they are unable to
manage their quote and update that
quote.
The Exchange’s proposal offers NOM
Market Makers the ability to have SQF
and OTTO orders removed within the
same timeframes in order that NOM
Market Makers may attend to all open
interest in a similar manner with this
risk feature. The Exchange notes that
offering the shorter timeframe, despite
the fact that non-Market Maker
Participants may utilize this feature
does not impose an undue burden on
intra-market competition because the
removal feature will not be mandatory.
The disconnect feature for OTTO will be
mandatory, however market participants
will have the option to either enable or
disable removal feature, which would
result in the cancellation of all orders
submitted over an OTTO Port when
such port disconnects.
28 See
Sfmt 4703
52931
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The Exchange believes that it does not
impose an undue burden on intramarket competition to permit OTTO
users to disable the removal feature,
similar to FIX, because the Exchange
does not desire to require non-Market
Maker Participants to have orders
removed on mandatory basis. While the
Exchange believes that this risk feature
will mitigate the risk of potential
erroneous or unintended executions
associated with a loss in communication
with a Client Application which
protects investors and the public
interest, as noted above, Participants are
able to better anticipate the appropriate
time within which they may require
prior to a logoff as compared to the
Exchange.
The Exchange does not desire to
trigger unwarranted logoffs of
Participants and therefore permits
Participants to provide an alternative
time to the Exchange, within the
Exchange’s prescribed timeframe, which
authorized the Exchange to disconnect
the Participant. This hybrid approach
will permit NOM Market Makers to
synchronize the removal of their SQF
quotes and OTTO orders, while still
permitting non-NOM Market Makers the
ability to choose to enable the risk
feature.
Finally, the Exchange does not believe
that such change will impose any
burden on inter-market competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
Other options exchanges offer similar
functionality.29
mstockstill on DSK3G9T082PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
IV. Solicitation of Comments
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 30 and
subparagraph (f)(6) of Rule 19b–4
thereunder.31
29 See BOX’s Rule 8140, CBOE’s Rule 6.23C, Phlx
Rule 1019(c) and BX Rule at Chapter VI, Section
6(e).
30 15 U.S.C. 78s(b)(3)(a)(iii).
31 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
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17:34 Aug 09, 2016
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A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days from the
date of filing. However, Rule 19b–
4(f)(6)(iii) 32 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
it may immediately offer the proposed
risk protection feature. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest. The Exchange proposes to
adopt a functionality designed to assist
Participants with managing certain risks
in the event that a Participant loses
communication with its FIX, SQF, or
OTTO Ports due to a loss of
connectivity. The Commission notes
that other options exchanges currently
have similar risk protection
functionalities for their members.33
Therefore, the Commission hereby
waives the 30-day operative delay and
designates the proposal operative upon
filing.34 At any time within 60 days of
the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
32 17 CFR 240.19b–4(f)(6)(iii).
33 See Phlx Rule 1019(c) and BX Rule at Chapter
VI, Section 6(e).
34 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
PO 00000
Frm 00123
Fmt 4703
Sfmt 9990
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2016–097 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2016–097. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NASDAQ–2016–097 and should be
submitted on or before August 31, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–18911 Filed 8–9–16; 8:45 am]
BILLING CODE 8011–01–P
35 17
E:\FR\FM\10AUN1.SGM
CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 81, Number 154 (Wednesday, August 10, 2016)]
[Notices]
[Pages 52926-52932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18911]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78480; File No. SR-NASDAQ-2016-097]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to Detection of Loss of Connection
August 4, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 28, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to
[[Page 52927]]
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend NASDAQ Options Market LLC's
(``NOM'') Rules at Chapter VI, Section 6, entitled ``Acceptance of
Quotes and Orders'' to adopt functionality which is designed to assist
NOM Participants, hereinafter ``Participants,'' in the event that they
lose communication with their assigned Financial Information eXchange
(``FIX''),\3\ Specialized Quote Feed (``SQF''),\4\ or Ouch to Trade
Options (``OTTO'') \5\ Ports due to a loss of connectivity.
---------------------------------------------------------------------------
\3\ FIX permits the entry of orders.
\4\ SQF permits the transmission of quotes to the Exchange by a
NOM Market Maker using its Client Application.
\5\ OTTO permits the transmission of orders to the Exchange by a
Participant. Immediate or cancel orders will not be cancelled
pursuant to this Chapter VI, Section 6 because, by definition, these
orders will cancel if not executed. All Participants have the
ability to utilize OTTO. Orders submitted by NOM Market Makers over
this interface will be treated as quotes.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Chapter VI, Section 6, entitled
``Acceptance of Quotes and Orders'' to adopt a new section ``(e)''
entitled ``Detection of Loss of Connection,'' a new automated process
which NOM proposes to adopt for its SQF,\6\ FIX and OTTO Ports in the
event that they lose communication with a Client Application due to a
loss of connectivity. This feature is designed to protect NOM Options
Market Makers \7\ and other market participants from inadvertent
exposure to excessive risk.
---------------------------------------------------------------------------
\6\ Today, SQF, FIX and OTTO have the capability to cancel
quotes and orders respectively. The rule change would adopt a
formalized process to automatically disconnect and cancel quotes for
SQF and offer the opportunity to cancel orders for FIX and OTTO in
addition to a disconnect if elected, when there is a loss of
communication with the Participant's Client Application. The
Exchange is formalizing the process within Chapter VI, Section 6(e).
\7\ The term ``Nasdaq Options Market Maker'' or ``Options Market
Maker'' (herein ``NOM Market Maker'') means an Options Participant
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VII of these Rules.
See NOM Rules at Chapter I, Section 1(a)(26).
---------------------------------------------------------------------------
By way of background, Participants currently enter quotes and
orders utilizing either an SQF, FIX or OTTO Port. SQF is utilized by
NOM Options Market Makers. FIX and OTTO are available to all market
participants. These ports are System \8\ components through which a
Participant communicates its quotes and/or orders to the NOM match
engine through the Participant's Client Application.
---------------------------------------------------------------------------
\8\ The term ``System'' shall mean the automated system for
order execution and trade reporting owned and operated by NOM as the
NOM Options market. See Chapter VI, Section 1(a).
---------------------------------------------------------------------------
Under the proposed rule change, an SQF Port would be defined as the
Exchange's System component through which Participants communicate
their quotes from the Client Application at proposed Chapter VI,
Section 6(e)(i)(B). FIX and OTTO Ports would be defined as the
Exchange's System components through which Participants communicate
their orders from the Client Application at proposed Chapter VI,
Section 6(e)(i)(C). NOM Options Market Makers may submit quotes to the
Exchange from one or more SQF Ports.
Similarly, market participants may submit orders to the Exchange
from one or more FIX and/or OTTO Ports. The proposed removal feature
will be mandatory for each NOM Market Makers utilizing SQF for the
removal of quotes and optional for any market participant utilizing FIX
and OTTO for the removal of orders.
When the SQF Port detects the loss of communication with a
Participant's Client Application because the Exchange's server does not
receive a Heartbeat message \9\ for a certain period of time (``nn''
seconds), the Exchange will automatically logoff the Participant's
affected Client Application and automatically cancel all of the
Participant's open quotes. Quotes will be cancelled across all Client
Applications that are associated with the same NOM Market Makers ID and
underlying issues.
---------------------------------------------------------------------------
\9\ It is important to note that the Exchange separately sends a
connectivity message to the Participant as evidence of connectivity.
---------------------------------------------------------------------------
The Exchange proposes to define ``Client Application'' as the
System component of the Participant through which the Exchange
Participant communicates its quotes and orders to the Exchange at
proposed Chapter VI, Section 6(e)(i)(D). The Exchange proposes to
define a ``Heartbeat'' message as a communication that acts as a
virtual pulse between the SQF, FIX or OTTO Port and the Client
Application at proposed Chapter VI, Section 6(e)(i)(A). The Heartbeat
message sent by the Participant and subsequently received by the
Exchange allows the SQF, FIX or OTTO Port to continually monitor its
connection with the Participant.
SQF Ports
The Exchange's System has a default time period, which will trigger
a disconnect from the Exchange and remove quotes, set to fifteen (15)
seconds for SQF Ports. A Participant may change the default period of
``nn'' seconds of no technical connectivity to trigger a disconnect
from the Exchange and remove quotes to a number between one hundred
(100) milliseconds and 99,999 milliseconds for SQF Ports prior to each
session of connectivity to the Exchange. This feature is enabled for
each NOM Market Makers and may not be disabled.
There are two ways to change the number of ``nn'' seconds: (1)
systemically or (2) by contacting the Exchange's operations staff. If
the Participant systemically changes the default number of ``nn''
seconds, that new setting shall be in effect throughout the current
session of connectivity \10\ and will then default back to fifteen
seconds.\11\ The Participant may change the default setting
systemically prior to each session of connectivity. The Participant may
also communicate the time to the Exchange by calling the Exchange's
operations staff. If the time period is communicated to the
[[Page 52928]]
Exchange by calling Exchange operations, the number of ``nn'' seconds
selected by the Participant shall persist for each subsequent session
of connectivity until the Participant either contacts Exchange
operations and changes the setting or the Participant systemically
selects another time period prior to the next session of connectivity.
---------------------------------------------------------------------------
\10\ Each time the Participant connects to the Exchange's System
is a new period of connectivity. For example, if the Participant
were to connect and then disconnect within a trading day several
times, each time the Participant disconnected the next session would
be a new session of connectivity.
\11\ The Exchange's System would capture the new setting
information that was changed by the Participant and utilize the
amended setting for that particular session. The setting would not
persist beyond the current session of connectivity and the setting
would default back to 15 seconds for the next session if the
Participant did not change the setting again.
---------------------------------------------------------------------------
FIX Ports
The Exchange's System has a default time period, which will trigger
a disconnect from the Exchange and remove orders, set to thirty (30)
seconds for FIX Ports. The Participant may disable the removal of
orders feature but not the disconnect feature. If the Participant
elects to have its orders removed, in addition to the disconnect, the
Participant may determine a time period of no technical connectivity to
trigger the disconnect and removal of orders between (1) second and
thirty (30) seconds for FIX Ports prior to each session of connectivity
to the Exchange.
There are two ways to change the number of ``nn'' seconds: (1)
systemically or (2) by contacting the Exchange's operations staff. If
the Participant systemically changes the default number of ``nn''
seconds, that new setting shall be in effect throughout that session of
connectivity and will then default back to thirty seconds at the end of
that session. The Participant may change the default setting
systemically prior to each session of connectivity. The Participant may
also communicate the time to the Exchange by calling the Exchange's
operations staff. If the time period is communicated to the Exchange by
calling Exchange operations, the number of ``nn'' seconds selected by
the Participant shall persist for each subsequent session of
connectivity until the Participant either contacts Exchange operations
and changes the setting or the Participant systemically selects another
time period prior to the next session of connectivity.
Similar to SQF Ports, when a FIX Port detects the loss of
communication with a Participant's Client Application for a certain
time period (``nn'' seconds), the Exchange will automatically logoff
the Participant's affected Client Application and if elected,
automatically cancel all open orders. The Participant may have an order
which has routed away prior to the cancellation, in the event that the
order returns to the Order Book, because it was either not filled or
partially filled, that order will be subsequently cancelled.
The disconnect feature is mandatory for FIX users, however the user
has the ability to elect to also enable a removal feature, which will
cancel all open orders submitted through that FIX Port. If the removal
of orders feature is not enabled, the System will simply disconnect the
FIX user and not cancel any orders. The FIX user would have to commence
a new session to add, modify or cancel its orders once disconnected.
OTTO Ports
The Exchange's System has a default time period, which will trigger
a disconnect from the Exchange and remove orders, set to fifteen (15)
seconds for OTTO Ports. The Participant may disable the removal of
orders feature but not the disconnect feature. If the Participant
elects to have its orders removed, in addition to the disconnect, the
Participant may determine a time period of no technical connectivity to
trigger the disconnect and removal of orders between one hundred (100)
milliseconds and 99,999 milliseconds.
There are two ways to change the number of ``nn'' seconds: (1)
systemically or (2) by contacting the Exchange's operations staff. If
the Participant systemically changes the default number of ``nn''
seconds, that new setting shall be in effect throughout that session of
connectivity and will then default back to fifteen seconds at the end
of that session. The Participant may change the default setting
systemically prior to each session of connectivity. The Participant may
also communicate the time to the Exchange by calling the Exchange's
operations staff. If the time period is communicated to the Exchange by
calling Exchange operations, the number of ``nn'' seconds selected by
the Participant shall persist for each subsequent session of
connectivity until the Participant either contacts Exchange operations
and changes the setting or the Participant systemically selects another
time period prior to the next session of connectivity.
Similar to SQF and FIX Ports, when an OTTO Port detects the loss of
communication with a Participant's Client Application for a certain
time period (``nn'' seconds), the Exchange will automatically logoff
the Participant's affected Client Application and if elected,
automatically cancel all open orders. The Participant may have an order
which has routed away prior to the cancellation; in the event that the
order returns to the Order Book, because it was either not filled or
partially filled, that order will be subsequently cancelled.
The disconnect feature is mandatory for OTTO users however the user
has the ability to elect to also enable a removal feature, which will
cancel all open orders submitted through that OTTO Port. If the removal
of orders feature is not enabled, the System will simply disconnect the
OTTO user and not cancel any orders. The OTTO user would have to
commence a new session to add, modify or cancel its orders once
disconnected.
The trigger for the SQF, FIX and OTTO Ports is event and Client
Application specific. The automatic cancellation of the NOM Market
Maker's quotes for SQF Ports and open orders, if elected by the
Participant for FIX and OTTO Ports entered into the respective SQF, FIX
or OTTO Ports via a particular Client Application will neither impact
nor determine the treatment of the quotes of other NOM Market Makers
entered into SQF Ports or orders of the same or other Participants
entered into FIX or OTTO Ports via a separate and distinct Client
Application.
In other words, with respect to quotes, each NOM Market Maker only
maintains one quote in a given option in the order book. A new quote
would replace the existing quote. Orders on the other hand do not
replace each other in the order book as multiple orders may exist in a
given option at once. Therefore, the difference in the impact between
NOM Market Makers submitting quotes and Participants submitting orders
is that quotes may continue to be submitted and/or refreshed by
unaffected NOM Market Makers because these market participants are
cancelled based on ID when an SQF Port disconnects, whereas all of the
open orders submitted by a given firm will be impacted when a FIX or
OTTO port disconnects, if the firm elected to have orders cancelled.
The Exchange will issue an Options Trader Alert advising
Participants on the manner in which they should communicate the number
of ``nn'' seconds to the Exchange for SQF, FIX and OTTO Ports.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by offering removal functionality for NOM Market Makers as
well as all other market participants to prevent disruption in the
marketplace and also
[[Page 52929]]
offering this removal feature to other market participants.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
NOM Market Makers will be required to utilize removal functionality
with respect to SQF Ports. This feature will remove impediments to and
perfect the mechanism of a free and open market and a national market
system and protect investors and the public interest by requiring NOM
Market Makers quotes to be removed in the event of a loss of
connectivity with the Exchange's System. NOM Market Makers provide
liquidity to the market place and have obligations unlike other market
participants.\14\ This risk feature for SQF is important because it
will enable NOM Market Makers to avoid risks associated with
inadvertent executions in the event of a loss of connectivity with the
Exchange. The proposed rule change is designed to not permit unfair
discrimination among market participants, as it would apply uniformly
to all NOM Market Makers utilizing SQF.
---------------------------------------------------------------------------
\14\ Pursuant to NOM Rules at Chapter VII, Section 5, entitled
``Obligations of NOM Options Market Makers'', in registering as a
market maker, an Options Participant commits himself to various
obligations. Transactions of a NOM Options Market Makers must
constitute a course of dealings reasonably calculated to contribute
to the maintenance of a fair and orderly market, and NOM Options
Market Makers should not make bids or offers or enter into
transactions that are inconsistent with such course of dealings.
Further, all NOM Options Market Makers are designated as specialists
on NOM for all purposes under the Act or rules thereunder. See
Chapter VII, Section 5.
---------------------------------------------------------------------------
Utilizing a time period for SQF Ports of fifteen (15) seconds and
permitting the NOM Market Makers to modify the setting to between 100
milliseconds and 99,999 milliseconds is consistent with the Act because
the Exchange does not desire to trigger unwarranted logoffs of
Participants and therefore allows Participants the ability to set their
time in order to enable the Exchange the authority to disconnect the
Participant with this feature. Each NOM Market Makers has different
levels of sensitivity with respect to this disconnect setting and each
NOM Market Makers has their own system safeguards as well. A default
setting of fifteen (15) seconds is appropriate to capture the needs of
all NOM Market Makers and high enough not to trigger unwarranted
removal of quotes.
Further, NOM Market Makers are able to customize their setting. The
Exchange's proposal to permit a timeframe for SQF Ports between 100
milliseconds and 99,999 milliseconds is consistent with the Act and the
protection of investors because the purpose of this feature is to
mitigate the risk of potential erroneous or unintended executions
associated with a loss in communication with a Client Application.
Participants are able to better anticipate the appropriate time within
which they may require prior to a logoff as compared to the Exchange.
The Participant is being offered a timeframe by the Exchange within
which to select the appropriate time. The Exchange does not desire to
trigger unwarranted logoffs of Participants and therefore permits
Participants to provide an alternative time to the Exchange, within the
Exchange's prescribed timeframe, which authorized the Exchange to
disconnect the Participant. The ``nn'' seconds serve as the
Participant's instruction to the Exchange to act upon the loss of
connection and remove quotes from the System. This range will
accommodate Participants in selecting their appropriate times within
the prescribed timeframes.
Also, NOM Market Makers have quoting obligations \15\ and are more
sensitive to price movements as compared to other market participants.
It is consistent with the Act to provide a wider timeframe within which
to customize settings for FIX Ports as compared to SQF Ports. NOM
Market Makers need to remain vigilant of market conditions and react
more quickly to market movements as compared to other Participants
entering orders into the System. The proposal acknowledges this
sensitivity borne by NOM Market Makers and reflects the reaction time
of NOM Market Makers as compared to Participants entering orders. Of
note, the proposed customized timeframe for FIX would be too long for
NOM Market Makers given their quoting requirements and sensitivity to
price movements. NOM Market Makers would be severely impacted by a loss
of connectivity of more than several seconds. The NOM Market Makers
would have exposure during the time period in which they are unable to
manage their quote and update that quote. The Participant is best
positioned to determine its setting.
---------------------------------------------------------------------------
\15\ See note 14 above.
---------------------------------------------------------------------------
The Exchange's proposal is further consistent with the Act because
it will mitigate the risk of potential erroneous or unintended
executions associated with a loss in communication with a Client
Application which protects investors and the public interest. Also, any
interest that is executable against a NOM Market Maker's quotes that is
received \16\ by the Exchange prior to the trigger of the disconnect to
the Client Application, which is processed by the System, automatically
executes at the price up to the NOM Market Maker's size. In other
words, the System will process the request for cancellation in the
order it was received by the System.
---------------------------------------------------------------------------
\16\ The time of receipt for an order or quote is the time such
message is processed by the Exchange book.
---------------------------------------------------------------------------
The System operates consistently with the firm quote obligations of
a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically,
with respect to NOM Market Makers, their obligation to provide
continuous two-sided quotes on a daily basis is not diminished by the
removal of such quotes triggered by the disconnect. NOM Market Makers
are required to provide continuous two-sided quotes on a daily
basis.\17\ NOM Market Makers will not be relieved of the obligation to
provide continuous two-sided quotes on a daily basis, nor will it
prohibit the Exchange from taking disciplinary action against a NOM
Market Makers for failing to meet the continuous quoting obligation
each trading day as a result of disconnects.
---------------------------------------------------------------------------
\17\ See note 14 above.
---------------------------------------------------------------------------
The proposal to permit NOM Market Makers to amend the default
setting at the beginning of each session of connectivity is consistent
with the Act because it avoids unwarranted logoffs of Participants and
provides Participants the opportunity to set a time, within the
prescribed timeframe, to authorize the Exchange to disconnect the
Participant.
Today, NASDAQ PHLX LLC (``Phlx'') and NASDAQ BX, INC. (``BX'')
offer its market makers a similar feature to the one proposed by the
Exchange for the automatic removal of quotes when connectivity issues
arise.\18\ Phlx and BX have identical rules to the NOM proposal for SQF
Ports.
---------------------------------------------------------------------------
\18\ See Phlx Rule 1019(c) and BX Rule at Chapter VI, Section
6(e).
---------------------------------------------------------------------------
With respect to FIX Ports,\19\ the Exchange will offer an optional
removal functionality to all market participants. Offering the FIX
removal feature on a voluntary basis to all other non-Market Maker
Participants is consistent with the Act because it permits them an
opportunity to utilize this risk feature, if desired, and avoid risks
associated with inadvertent executions in the event of a loss of
connectivity with the Exchange. The removal feature is designed to
mitigate the risk of missed and/or unintended executions associated
with a loss in communication with a Client Application.
---------------------------------------------------------------------------
\19\ OTTO ports may be utilized today by non-NOM Market Makers.
The removal functionality remains optional for non-NOM Market Makers
similar to FIX.
---------------------------------------------------------------------------
The proposed rule change is designed to not permit unfair
discrimination among market participants, as this
[[Page 52930]]
removal feature will be offered uniformly to all Participants utilizing
FIX. The Exchange will not require OTTO users to utilize the removal
feature for orders similar to FIX. The disconnect feature for FIX is
mandatory, however market participants will have the option to either
enable or disable the removal feature, which would result in the
cancellation of all orders submitted over a FIX port when such port
disconnects. It is appropriate to offer this removal feature as
optional to all market participants utilizing FIX because these market
participants may not bear the same magnitude of risk of potential
erroneous or unintended executions.\20\ In addition, market
participants utilizing FIX may desire their orders to remain on the
order book despite a technical disconnect, so as not to miss any
opportunities for execution of such orders while the FIX session is
disconnected. The Exchange will disconnect Participants from the
Exchange and not cancel its orders if the removal feature is disabled
for FIX. The disconnect feature is mandatory and will cause the
Participant to be disconnected within the default timeframe or the
timeframe otherwise specified by the Participant.
---------------------------------------------------------------------------
\20\ NOM Market Makers utilizes both SQF and OTTO and would be
subject to quoting obligations.
---------------------------------------------------------------------------
This feature is consistent with the Act because it enables FIX or
OTTO users, particularly non-Market Maker OTTO users, the ability to
disconnect from the Exchange, assess the situation and make a
determination concerning their risk exposure. The Exchange notes that
in the event that orders need to be removed, the Participant may elect
to utilize the Kill Switch \21\ feature. It is consistent with the Act
to require other market participants to be disconnected because the
Participant is otherwise not connected to the Exchange's System and the
Participant simply needs to reconnect to commence submitting and
cancelling orders. Requiring a disconnect when a loss of communication
is detected is a rational course of action for the Exchange to alert
the Participant of the technical connectivity issue.
---------------------------------------------------------------------------
\21\ See NOM Rule at Chapter VI, Section 6(d). The Kill Switch
would impact all three protocols, SQF, FIX and OTTO.
---------------------------------------------------------------------------
The Exchange's proposal to set a default timeframe of thirty (30)
seconds for FIX and permit a FIX user to customize their timeframe
between 1 second and 30 seconds for the removal of orders is consistent
with the Act and the protection of investors because the purpose of
this optional feature is to mitigate the risk of potential erroneous or
unintended executions associated with a loss in communication with a
Client Application. Participants selecting the removal feature are able
to better anticipate the appropriate time that they require prior to a
logoff as compared to the Exchange, within the Exchange's prescribed
timeframes.
The Exchange does not desire to trigger unwarranted logoffs of
Participants and therefore permits Participants to provide a time to
the Exchange, within the Exchange's prescribed timeframe, to authorize
the Exchange to disconnect the Participant and remove orders. The
``nn'' seconds serve as the Participant's instruction to the Exchange
to act upon the loss of connection and remove orders from the System.
The Participant is also best positioned to determine that it only
desires the disconnect feature, which is mandatory, and not the removal
feature.
The Exchange's proposal to offer FIX users the removal feature on a
voluntary basis is similar to Phlx and BX.\22\ Both Phlx and BX have
identical rules regarding FIX and a loss of communication as proposed
for NOM.
---------------------------------------------------------------------------
\22\ See Phlx Rule 1019(c) and BX Rule at Chapter VI, Section
6(e).
---------------------------------------------------------------------------
The proposed timeframe for the FIX feature is consistent with the
Act because the Exchange seeks to provide its Participants with the
ability to select the amount of time that they desire for a loss of
communication prior to taking action to cancel open orders or simply
disconnect. The Participant should have the ability to select the
appropriate time, within a prescribed timeframe, for authorizing the
Exchange to cancel its open orders or simply disconnect from the
Exchange. Inadvertent cancellations may create a greater risk of harm
to investors and the Participant is better positioned to determine the
appropriate time, with the prescribed timeframe, to remove orders or
disconnect.
With respect to OTTO Ports, the Exchange notes that it offers OTTO
to all market participants, not just NOM Market Makers. Similar to SQF,
the Exchange desires to utilize the 15 second default with the ability
to customize the setting to permit a timeframe between 100 milliseconds
and 99,999 milliseconds. The Exchange believes that it is consistent
with the Act to utilize the shorter timeframe of 15 seconds as compared
to the 30 second timeframe for FIX because today, OTTO is utilized
solely by NOM Market Makers, although it is offered to all
Participants. OTTO orders submitted by NOM Market Makers over this
interface are treated as quotes for purposes of compiling with quoting
obligations.
As noted previously, NOM Market Makers have quoting obligations
\23\ and are more sensitive to price movements as compared to other
market participants. NOM Market Makers need to remain vigilant of
market conditions and react more quickly to market movements as
compared to other Participants entering orders into the System. The
proposal acknowledges this sensitivity borne by NOM Market Makers and
reflects the reaction time of NOM Market Makers as compared to
Participants entering orders. NOM Market Makers would be severely
impacted by a loss of connectivity of more than several seconds. The
NOM Market Makers would have exposure during the time period in which
they are unable to manage their quote and update that quote. The
Participant is best positioned to determine its setting. Also, the
Exchange desires to offer NOM Market Makers the ability to have SQF
quotes and OTTO orders removed with the same timeframes in order that
NOM Market Makers may attend to all open interest in a similar manner
with this risk feature.
---------------------------------------------------------------------------
\23\ See note 14 above.
---------------------------------------------------------------------------
The Exchange notes that offering the shorter timeframe, despite the
fact that non-Market Maker Participants are utilizing this feature is
also consistent with the Act because the removal feature will not be
mandatory. The disconnect feature for OTTO will be mandatory, however
market participants will have the option to either enable or disable
the removal feature, which would result in the cancellation of all
orders submitted over an OTTO Port when such port disconnects. NOM
Market Makers will be able to set a similar timeframe for both SQF and
OTTO to ensure all open interest is removed simultaneously.
The Exchange believes that it is consistent with the Act to permit
OTTO users to disable the removal feature, similar to FIX, because the
Exchange does not desire to require non-Market Maker Participants to
have orders removed on mandatory basis. While the Exchange believes
that this risk feature will mitigate the risk of potential erroneous or
unintended executions associated with a loss in communication with a
Client Application which protects investors and the public interest, as
noted above, Participants are able to better anticipate the appropriate
time within which they may require prior to a logoff as compared to the
Exchange.
The Exchange does not desire to trigger unwarranted logoffs of
Participants and therefore permits
[[Page 52931]]
Participants to provide an alternative time to the Exchange, within the
Exchange's prescribed timeframe, which authorized the Exchange to
disconnect the Participant. The ``nn'' seconds serve as the
Participant's instruction to the Exchange to act upon the loss of
connection and remove quotes from the System. This range will
accommodate Participants in selecting their appropriate times within
the prescribed timeframes.
The Exchange believes this hybrid approach will permit NOM Market
Makers to synchronize the removal of their SQF quotes and OTTO
orders,\24\ while still permitting non-Market Maker Participants the
ability to choose to enable the risk feature. OTTO is not available on
either Phlx or BX, so the OTTO feature is not similar to those markets,
rather, as mentioned, it is a hybrid approach.
---------------------------------------------------------------------------
\24\ NOM Market Makers may utilize both SQF and OTTO.
---------------------------------------------------------------------------
It is appropriate to offer this removal feature as optional to all
Participants utilizing OTTO, who may not be required to provide quotes
in all products in which they are registered. Non-Market Maker
Participants utilizing OTTO may not bear the same magnitude of risk of
potential erroneous or unintended executions as NOM Market Makers. In
addition, non-Market Maker Participants utilizing OTTO may desire their
orders to remain on the order book despite a technical disconnect, so
as not to miss any opportunities for execution of such orders while the
OTTO session is disconnected. OTTO is similar to FIX on Phlx and BX
because it offers market participants, on a voluntary basis, the
ability to cancel orders when a technical disconnect occurs.\25\
---------------------------------------------------------------------------
\25\ See Phlx Rule 1019(c) and BX Rule at Chapter VI, Section
6(e).
---------------------------------------------------------------------------
The Exchange's default timeframe for the disconnect and removal of
orders for OTTO is 15 seconds with the ability to modify that timeframe
to between 100 milliseconds and 99,999 milliseconds, on a session by
session basis. This timeframe is similar to the SQF timeframe offered
by Phlx and BX today.\26\ Similar to FIX on Phlx and BX today, OTTO
users may choose to enable or disable the removal feature when a
disconnect occurs. The proposed timeframe for the OTTO feature is
consistent with the Act because the Exchange seeks to provide its
Participants with the ability to select the amount of time that they
desire for a loss of communication prior to taking action to cancel
open orders or simply disconnect.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
The Exchange notes that Participants are free to select the
protocols with which they desire to access NOM. The Exchange does not
require Participants to utilize more than one protocol to access NOM.
The proposed rule change will help maintain a fair and orderly market
which promotes efficiency and protects investors. This mandatory
removal feature for NOM Market Makers using SQF and optional removal
for all market participants using FIX or OTTO will mitigate the risk of
potential erroneous or unintended executions associated with a loss in
communication with a Client Application.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the Exchange does
not believe the proposed rule change will cause an undue burden on
intra-market competition because NOM Market Makers, unlike other market
participants, have greater risks in the market place. Quoting across
many series in an option creates large principal positions that expose
NOM Market Makers, who are required to continuously quote in assigned
options, to potentially significant market risk.
Providing a broader timeframe for the disconnect and removal of
orders for FIX as compared to the disconnect and removal of quotes for
SQF Ports does not create an undue burden on competition. NOM Market
Makers have quoting obligations \27\ and are more sensitive to price
movements as compared to other market participants. The proposal does
not impose an undue burden on intra-market competition because it
provides a tighter timeframe for the disconnect and removal of quotes
for SQF Ports as compared to the disconnect and removal of orders, if
enabled, for FIX Ports. NOM Market Makers need to remain vigilant of
market conditions and react more quickly to market movements as
compared to other Participants entering multiple orders into the
System.
---------------------------------------------------------------------------
\27\ See note 14 above.
---------------------------------------------------------------------------
The proposal reflects this sensitivity borne by NOM Market Makers
and reflects the reaction time of NOM Market Makers as compared to
other Participants entering orders. Offering the removal feature to
other market participants on an optional basis for FIX and OTTO users
does not create an undue burden on intra-market competition because
unlike NOM Market Makers, other market participants do not bear the
same risks of potential erroneous or unintended executions. FIX users
have the opportunity to disable the removal feature and simply
disconnect from the Exchange. FIX users may also set a timeframe that
is appropriate for their business. It is appropriate to offer this
optional cancellation functionality to other market participants for
open orders, because those orders are subject to risks of missed and/or
unintended executions due to a lack of connectivity which the
Participants need to weigh.
Today, OTTO is utilized solely by NOM Market Makers, although it is
offered to all Participants. OTTO Orders submitted by NOM Market Makers
over this interface are treated as quotes for purposes of compiling
with quoting obligations. NOM Market Makers have quoting obligations
\28\ and are more sensitive to price movements as compared to other
market participants. NOM Market Makers need to remain vigilant of
market conditions and react more quickly to market movements as
compared to other Participants entering orders into the System. For
this reason, the proposal does not impose an undue burden on intra-
market competition because the proposal acknowledges this sensitivity
borne by NOM Market Makers and reflects the reaction time of NOM Market
Makers as compared to Participants entering orders. As noted, NOM
Market Makers would be severely impacted by a loss of connectivity of
more than several seconds. NOM Market Makers would have exposure during
the time period in which they are unable to manage their quote and
update that quote.
---------------------------------------------------------------------------
\28\ See note 14 above.
---------------------------------------------------------------------------
The Exchange's proposal offers NOM Market Makers the ability to
have SQF and OTTO orders removed within the same timeframes in order
that NOM Market Makers may attend to all open interest in a similar
manner with this risk feature. The Exchange notes that offering the
shorter timeframe, despite the fact that non-Market Maker Participants
may utilize this feature does not impose an undue burden on intra-
market competition because the removal feature will not be mandatory.
The disconnect feature for OTTO will be mandatory, however market
participants will have the option to either enable or disable removal
feature, which would result in the cancellation of all orders submitted
over an OTTO Port when such port disconnects.
[[Page 52932]]
The Exchange believes that it does not impose an undue burden on
intra-market competition to permit OTTO users to disable the removal
feature, similar to FIX, because the Exchange does not desire to
require non-Market Maker Participants to have orders removed on
mandatory basis. While the Exchange believes that this risk feature
will mitigate the risk of potential erroneous or unintended executions
associated with a loss in communication with a Client Application which
protects investors and the public interest, as noted above,
Participants are able to better anticipate the appropriate time within
which they may require prior to a logoff as compared to the Exchange.
The Exchange does not desire to trigger unwarranted logoffs of
Participants and therefore permits Participants to provide an
alternative time to the Exchange, within the Exchange's prescribed
timeframe, which authorized the Exchange to disconnect the Participant.
This hybrid approach will permit NOM Market Makers to synchronize the
removal of their SQF quotes and OTTO orders, while still permitting
non-NOM Market Makers the ability to choose to enable the risk feature.
Finally, the Exchange does not believe that such change will impose
any burden on inter-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Other options
exchanges offer similar functionality.\29\
---------------------------------------------------------------------------
\29\ See BOX's Rule 8140, CBOE's Rule 6.23C, Phlx Rule 1019(c)
and BX Rule at Chapter VI, Section 6(e).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \30\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(3)(a)(iii).
\31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days from the date of filing. However, Rule
19b-4(f)(6)(iii) \32\ permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange has asked the Commission to waive the
30-day operative delay so that it may immediately offer the proposed
risk protection feature. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and
the public interest. The Exchange proposes to adopt a functionality
designed to assist Participants with managing certain risks in the
event that a Participant loses communication with its FIX, SQF, or OTTO
Ports due to a loss of connectivity. The Commission notes that other
options exchanges currently have similar risk protection
functionalities for their members.\33\ Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposal operative
upon filing.\34\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\32\ 17 CFR 240.19b-4(f)(6)(iii).
\33\ See Phlx Rule 1019(c) and BX Rule at Chapter VI, Section
6(e).
\34\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2016-097 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2016-097. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2016-097 and should
be submitted on or before August 31, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18911 Filed 8-9-16; 8:45 am]
BILLING CODE 8011-01-P
